Pennsylvania’s Property Tax Exemption Might Go To Voters

Battle lines are being drawn in Pennsylvania between the courts and the legislative bodies with nonprofits squarely in the crossfire. At issue is who gets to decide if an organization “of purely public charity” is exempt from property tax.

The judges say they can determine exemption subjectively, while the legislators claim there is already a perfectly fine rule on the books for determining it.

A bill to amend Pennsylvania’s state constitution that would make the legislature the sole arbiter of exemption has passed both the house and the senate. As a constitutional amendment the bill, known as Senate Bill 4 or SB4, must go through another round of approval in 2015 and then pass a voter referendum. It’s not doing anything new, said Scott Bishop of the Harrisburg, Pa.-based Hospital and Healthsystem Association of Pennsylvania (HAP). It rolls the state of determination back to before 2012 and the court case Mestivah Eitz Haim of Bobov Inc. vs. Pike County (Mestivah).

According to Bishop, Pennsylvania was like the Wild West when it came to tax exemption determination before 1997. There were few standards, which created a climate of uncertainty. There was the so-called HUP test, which came from a 1985 case Hospital Utilization Project (HUP) vs. Commonwealth. The HUP test put forth five criteria to determine if an institution is a purely public charity. It would have to:

  • Advance a charitable purpose;
  • Operate entirely free from private profit motive;
  • Donate or render gratuitously a substantial portion of its services;
  • Benefit a substantial and indefinite class of person who are legitimate objects of charity; and,
  • Relieve the government of some of its burden.

However, the HUP test gave no guidance as to how organizations can accomplish or adhere to those five points. “Charities had a situation back then where they could be taken to court if a municipality didn’t think they should be property tax exempt,” said Jennifer Ross, chief information officer for the Pennsylvania Association of Nonprofit Organizations (PANO). “Organizations didn’t know what to do or how to defend themselves.”

That all changed with The Institutions of Purely Public Charity Act of 1997, commonly known as Act 55. It laid out ways for organizations to meet each of the five criteria. “I wasn’t part of the process back then, but folks said to me that this time in the 80s before Act 55, it was a circus trying to operate without any level of predictability,” said Bishop, HAP’s senior vice president of legislative services. “Act 55 provided stability and predictability.”

But in the Mestivah decision, the court decided not to use the Act 55 criteria and instead used its own metric, which Bishop and Ross both said is not entirely clear. “The court in Mestivah concluded the organization must prove it meets the criteria of the court; basically, they (the courts) supersede the legislation that’s been in place,” said Ross.

According to the state Supreme Court’s decision, written in April 2012 by Justice Michael Eakin, “The Commonwealth Court reasoned occasional use of appellant’s recreational and dining facilities by Pike County residents was insufficient to prove appellant relieved Pike County’s government of some of its burden,” criteria five of the HUP test.

Mestivah argued that it met the criteria according to Act 55. An appeal was rejected by the state Supreme Court in a 4-3 decision. “Neither appellant (Mestivah) nor any amici specifically identify any part of the Constitution which grants non-reviewable authority to the General Assembly to determine what does or does not constitute an institution of purely public charity,” wrote Eakin. “The legislature may certainly determine what exemptions it chooses to grant, but only within the boundaries of the Constitution — the constitutional identification of those boundaries remains the unique province of the judiciary.”

Justice Thomas Saylor wrote in the dissenting opinion, “The Legislature sets policy; the Court ensures that such legislation, and its enforcement, conform to constitutional mandates…I would defer to the General Assembly’s reasonable policy determination that an organization satisfying the criteria set forth in Act 55 is a purely public charity.”

Though he could not be specific, Bishop said the court has used its own metric a handful of times since the Mestivah decision. Bishop also believes the commonwealth’s courts have taken a more activist role in recent years. “We’ve had some reapportionment issues where the court has been more active than it needs to be. There are other examples of legislation where the court has imposed a policy perspective rather than a more traditional role,” he said. “This decision (Mestivah) and the fact they played a more activist role is consistent.”

The constitutional amendment would roll determination back to the way it was handled before 2012 and Mestivah. Ross and Bishop aren’t sure why the courts decided to supersede Act 55 in the first place. “Why they chose not to apply Act 55 or question its merits, I don’t know,” said Bishop. For him, one of the biggest problems with the court’s action is that they have not determined Act 55 to be unconstitutional; they just decided their criteria comes first.

“What made this confusing is they didn’t throw out Act 55, they simply chose not to apply it. That brings us back into a world of uncertainty,” said Bishop. “Our view has been if there’s an issue with Act 55, it should be a legislative process to figure that all out as opposed to the court saying one thing one time and another thing another time. The purpose of this bill is to put it back in the hands of the legislature.”  NPT