Making the Case: Pennsylvanian Not-for-Profits’ Real Estate Tax Exemption Under Review

Not-for-profit organizations who have obtained 503(c) status with the Internal Revenue Service typically are not assessed real estate taxes in Pennsylvania. This is because a “purely public charity” is exempted from this burden in the Pennsylvania State Constitution.  However, based on an April 2012 Pennsylvania Supreme Court decision, local governments have begun to challenge real estate tax exemption laws for certain not-for-profits.

In the 1985 decision of Hospital Utilization Project v. Commonwealth of Pennsylvania, the Pennsylvania State Supreme Court developed a five prong test for determining if an organization qualifies as a purely public charity.  This five prong test is known as the HUP test and includes the following factors:

  1. Advances a charitable purpose
  2. Donates or render 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
  5. Operates entirely free from private profit motive

Lawsuits based on this test challenged not-for-profits’ real estate tax exemptions up until 1997. In 1997, the State General Assembly passed Act 55, commonly called The Institutions of Purely Public Charity Act. Act 55 attempted to clarify, standardize, and, some would say, weaken the HUP test by broadening the parameters of the five factors to resolve inconsistent treatment of the HUP test by not-for-profit organizations.  Recently, the Pennsylvania State Supreme Court reaffirmed the validity of the HUP testing. The ruling, Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, issued in April 2012, set precedence that only an organization that meets all five criteria of the HUP test can be defined as a “purely public charity” as an organization.

Due to the recent challenges to the real estate tax exemption, not-for-profit organizations should evaluate themselves using the HUP test. This evaluation should be documented so the organization can defend their assessment if necessary. If an organization owns multiple properties, each property must be evaluated separately. These defensive evaluations should be reevaluated if programs or services change or there are other developments concerning not-for-profits in the Commonwealth.  The Pennsylvania State Senate has begun the process to amend the state constitution and clarify that the General Assembly has the power to define purely public charity.  Amending the state constitution takes time; if carried out, this process would result in Act 55, or any replacement, being the definition.

In the meantime, the picture isn’t all bleak.  Recently, a not-for-profit in Lehigh County won its case on appeal to maintain its real estate tax exemption.

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