The standards for determining real estate tax exemptions for nonprofits in Pennsylvania are the subject of a tug of war between Pennsylvania's legislative and judicial branches, and as the number of Pennsylvania taxing bodies in financial distress continues to rise, nonprofits may see more challenges to their real estate exempt status as governments seek to increase revenues.
In order for a Pennsylvania nonprofit to receive real estate tax exemption for its property, the nonprofit must prove that it meets the definition of a "purely public charity" under Article VII, Section 2 of the Pennsylvania Constitution. Although the Constitution provides for real property tax exemptions for institutions of purely public charity, it does not define the type of institution that meets this criteria.
In 1985, the Pennsylvania Supreme Court, in Hospital Utilization Project v. Commonwealth, synthesized a century's worth of case law to establish a five-part test for identifying qualifying institutions. Under the "HUP test," a qualifying institution must meet the following five requirements:
(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.
Despite the establishment of the five-part test in 1985, courts continued to reach varying conclusions regarding nonprofits' tax exemption status. As a result, in 1997, the Pennsylvania General Assembly passed Act 55, otherwise known as the Institutions of Purely Public Charity Act ("IPPCA"),[1] with the goal of eliminating inconsistent application of the HUP test by establishing specific legislative standards to determine whether an organization qualifies as an institution of purely public charity. IPPCA was designed to standardize and clarify the HUP test, but many critics argue that it served only to weaken the HUP test by broadening the parameters of the five-factors.
The Pennsylvania Supreme Court responded to this criticism in Mesivtah Eitz Chaim of Bobv, Inc. v. Pike County Board of Assessment Appeal, in which the Court found that the General Assembly had exceeded its constitutional authority in IPPCA. Without concluding that ICCPA was unconstitutional, it rendered the Act essentially moot by reinstating the stricter HUP standards as the threshold test.
Following the Mesivtah decision, members of the Pennsylvania Senate introduced Senate Bill 4, which would amend the state Constitution to provide that only the Legislature has the right to determine the criteria for whether an institution qualifies as a purely public charity. Senate Bill 4 passed both the House and the Senate in 2013, but the Constitution requires that all constitutional amendments must be passed in two consecutive legislative sessions. If the bill passes in the next session, which begins in January 2015, the bill must then be approved by Pennsylvania voters. Only if that happens will the Constitution be amended to overrule Mesivtah and reinstate the IPPCA standards for tax exemption. Until then, nonprofits must continue to meet the stricter HUP test standards when applying for exemption or withstanding challenges from local taxing authorities.
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